We are in the 11th Hour Now

My call for a stock market crash seems to have almost turned into an obsession. And to be quite frank uttering the words obsession and stock market in the same sentence is never a good idea.

This site is supposed to be about finding the best risk reward trade setups. I have to be honest and say that if I just started to look at the market today for the first time in many months I would have to say that there is really no trade to be had. The indices look very messy right now, we are situated in ‘no mans land’ right in the middle of a big trading range. Those are the areas where it is usually wise to completely avoid taking a position because a lot of the time it will just boil down to a 50/50 probability you are right.

But since I started talking about stock market crashes so much I am already standing very deep in this mud and need to finish what I started.

I am going to write a few more times about it with the following qualifiers:

The market MUST close next week HARD DOWN and preferably near 1040-1050 on the sp500

The market MUST at the very latest start to turn down hard by 2:15PM on Wednesday of next week (June 23, 2010)

Preferably the market will be down BIG (2 to 3%) this Monday, June 21st.

If we do not see all three of the above conditions met starting next week then my days of writing about crashes and collapses are over. So this may be my last ‘crash post’ I ever write depending on how things shape up next week. I will write about other stuff though (like going long AAPL at $275 maybe? 🙂 )

Why am I doing this ?

Because I feel as though we are in the 11th hour now. Based on all the indicators and the whole spectrum of different markets I look at it all boils down to next week for me. Next week is the ‘decider’ as George Bush used to say. If things do not start to fall apart next week very badly then the market will have evaded a dire crash scenario and it will just be business as usual, or perhaps business in slow motion instead of fast motion (ie. fast crashes).

Someone wrote to me that it is very unlikely the market would fall apart the last weeks into June because of end of quarter window dressing. As much as I want to deny that reality, I cannot help but succumb to the reality that it could be true. After all the game (the stock market) seems to be so rigged that 9 times out of 10 it always seems to go according to the traditional ‘manipulated plan’.

So my title for next week is ‘the Fed versus the Planets’ does the Fed have the power to change the orbit of the planets? Can they prevent a summer solstice from occurring ? I guess we will find out next week…

So here is a little brain dump of possible reasons why today could be the high for the year (2010) and why it is only hard down from here…

The gold price broke out to forever lifetime highs today. Admittedly the breakout on the GLD ETF was on lackluster volume which is a bit of a concern in terms of the supply demand relationship but for now I am believing the breakout. So my point is that the breakout in gold is telling me ‘someone knows something’ and that something very big could come out of the blue and could plummet the stock market.

The US Dollar has gone down in a straight line and the stock market has gone up in a straight line during the last two weeks. This seems highly unusual especially considering what the previous trends were. Based on my chart read it seems that a violent snap back in the opposite directions are in the cards.

The sp500 has just completed created three candlestick dojis in a row. There is a pattern known as a ‘tri star doji’ where the middle doji has to be a gap up doji and all three of them have to be star type dojis. We do not seem to fit that pattern. However sometimes these candlestick patterns don’t come out exactly as required but still give the same signals. During the bull run from march 2009 to April 2010 most of the time these little doji clusters did not mean anything. But now we are in different territory and my take is they can actually have some meaning now. We will know by Monday for sure, because if price closes above the three little dojis and gaps up and moves up strongly above them, then they are wrong signals. But if the market gaps down or closes down strongly below them, then they are giving a valid signal.

RSI right now is close to 54. I was looking for 55 to 60 as a final thrust up point before a downward resumption. Perhaps 54 is enough fuel for a downside move ?

A break below 1100 on Monday would create another 2B sell signal and could help along the scenario I am looking for. So 1100 is a good number to keep in mind. It is the diving line in the sand going forward.

The VOLUME was really lousy today especially considering today was options expiration. So once again the market close today at what seems like the peak of this rally was on air. Extremely light volume with 3 dojis at the peak of a really is not the most encourage sign your want to see for bullish follow through in the upcoming week.

In addition to the dojis, the low volume, the overbought RSI, on Monday June 21st is the Summer Solstice. If the market was moving HARD DOWN into the summer solstice I might be concerned for an upwards rebound rally. But instead we went almost straight up into this date.

So those are my points for the coming turn…

If I had to think of one thing that will cancel out all of the above points, it would simply be that bearish sentiment is very heavy right now and from a contrarian perspective is not what you want to see if one is looking for persistent downward price action.

Hey Tom:
I religiously read your analysis and conclusions from a technical perspective. It’s a great paper. The market moves forward on a technical, fundamental and seasonal basis as I think you’ve pointed out occasionally.

I am out of gold Friday afternoon though it showed resilience. Personally I ‘d like to see a break of 1160 decisively for my next commitment.

Have the faith and continue what you do. It forms a piece of my trading i.e. the technical side which I rely more heavily on. For me the market has behaved predictibly since April. It was up a lot, many undefined problems and summer approaching.